Deutsche Bank Gets It, Why Can’t Mrs. Merkel?

A report by the Deutsche Bank comparing the current euro crisis with the gold standard crisis of the 1930s has been quoted by a few bloggers. I can’t seem to find a link to the report itself, but here is what seems to be an extract from the Deutsche Bank report itself.

The 1930s in Europe was a slow moving game of falling dominoes with countries one by one leaving the narrow confines of the Gold Standard after chronic growth problems that a fixed currency system intensified. There was a definite trend in the 1930s that saw those countries that left the Gold Standard seeing a much quicker recovery from the Depression than those that stayed on for a number of years into the latter half of the decade. Figure 12 shows a case study of six countries currencies relative to Gold in the 1930s. We’ve rebased them to 100 at the start of the series. In order of leaving the Gold Standard, we had the UK (left September 1931), Sweden (also left September 1931), US (April 1933), Belgium (March 1935), France (September 1936) and Italy (October 1936).

Interestingly, by the middle of 1937 all had devalued by at least 40% to Gold except Belgium who had devalued by around 30% in 1935. France, which held on until September 1936, then saw its currency collapse by nearly 70% in the three years up to WWII. Figure 13 then shows the same six countries nominal (left) and real (right) GDP performance over the same period.

The UK and Sweden, which left the Gold Standard earliest (September 1931) in this sample, saw a ‘relatively’ mild negative growth shock compared to the other four. In contrast, France which stuck to Gold until late 1936 saw growth notably under-perform until they left the standard. Interestingly as discussed above, France later saw a dramatic 3 year 70% devaluation to Gold which helped restore nominal GDP close to that of the UK and Sweden by the end of the 1930s. However, in real terms they were still the laggard at this point. The worst slump of all was that seen in the US between 1929 and 1932 where they lost nearly half the value of their economy in nominal terms and nearly 30% in real terms. However, the bottom pretty much corresponded to the end of the Dollar’s gold convertibility and subsequent devaluation. From this point on, the recovery was fairly dramatic until the 1937 recession we’ll discuss below. Overall, Figure 13 does indicate some fairly strong evidence that growth did seem to respond to currency debasement and that countries which left this later ended up with weaker economies for longer and also, in France’s case, a more dramatic end devaluation.

Here is DBs comparison of the current crisis and the one eighty years ago.

In real terms, we are not too different in many countries to the outcome seen in the Depression. However, the overall price level in the economy has held up much better than it did in the 1930s leaving nominal GDP above its 2007/2008 peak in Austria (106.5 relative to a rebased 100 peak), Belgium (106.4), US (105.3), UK (104.7), Germany (103.7), France (103.3), Finland (102.9) and the Netherlands (101.3). Much of this has been because of QE and other dramatic interventions preventing the collapse of much systemically crucial debt (particularly banks) that would otherwise have defaulted and led to deflation.

However, all the peripheral five are below their nominal peak still with Portugal, Italy and Spain just below their peak but with Greece (92.8) and Ireland (82.4) well below. When using Ireland as a positive case study for what others can achieve, it is worth being aware that they have seen a near 20% fall in their economy on a nominal basis. This has allowed them to dramatically improve their competitiveness. Unless others are prepared to make the same hard decisions and can be funded in the meantime, we think they are unlikely to be able to repeat Ireland’s competitive gains.

The problem is that a country could just leave the gold standard or devalue its currency, as did Great Britain and Sweden in 1931, followed eventually by everyone else, if it wanted to. No one has yet figured out an escape from the euro trap. If Mrs. Merkel could only give her OK to the ECB to conduct a policy of aggressive monetary expansion, the euro might still be saved.  But, in her consummate narrow-mindedness, Mrs. Merkel seems determined to drive Europe into the abyss. OMG!


24 Responses to “Deutsche Bank Gets It, Why Can’t Mrs. Merkel?”

  1. 1 Luis H Arroyo December 14, 2011 at 10:33 am

    Very good, I subscribe it 100%


  2. 2 Benjamin Cole December 14, 2011 at 11:45 am

    Excellent blogging.

    Please Merkel, read this.


  3. 3 Mitch December 14, 2011 at 11:45 am

    Boy, that second is one confusion graph! The colors corresponding to the countries change from left to right, and it’s pretty hard to tell what triangles sit on which curves.

    The oddest thing is that Belgium seems to have had hardly any depression (judging from the right graph), yet they stayed on the gold standard for the second longest time.


  4. 4 Marcus Nunes December 14, 2011 at 12:27 pm

    I´ve shown (clearer) version of those graphs in class for many years. Why don´t the Germans (apart from the economists at DB) see it? Just as the scorpion bit the frog while beig carried across the river, when asked “why, now we´ll both die”, the scorpion answered “it´s in my nature”.
    Apparently the Brits understood this point very well more than 20 years ago!


  5. 5 David Pearson December 14, 2011 at 1:46 pm

    “No one has yet figured out an escape from the euro trap.”

    I think you might overstate the difference between leaving the gold standard and Euro regimes. First, let’s leave aside the cash issue: it is quite easy for Euros to circulate in an exiting country along with a published exchange rate for local currency. This would do until enough domestic currency is printed. Second, all debt contracts under domestic jurisdiction would be declared payable in local currency. Third, the exiting country would have a choice between defaulting on foreign-jurisdiction debt contracts or remaining current. Didn’t many (most?) gold-era debt contracts specify that the creditor could choose to take payment in specie? If so, then there is little difference between FDR abrogating those contracts and Greece defaulting today on foreign-jurisdiction debt.

    I would argue that MM’s should be urging the periphery countries to leave the Euro ASAP. It might seem a risky move with negative consequences. However, ex ante, didn’t most observers think the same about the gold standard exit?


  6. 6 David Glasner December 14, 2011 at 2:25 pm

    Luis and Benjamin, Thanks.

    Mitch, You’re right, it’s pretty bad, but since it was there already I just included it, anyway. You’re also right about Belgium. Will have to look into that. My conjecture off the top of my head is that Belgium followed France in rejoining the gold standard at an undervalued parity which cushioned the impact of deflation on wages, which started out at a low level. That’s why the decline real output in France was less steep than elsewhere. But no recovery started in France or Belgium started until they left gold.

    Marcus, How right you are!


  7. 7 David Glasner December 14, 2011 at 6:56 pm

    David, You are right that I overstated my point in saying that no has figured out an escape from the euro trap. It could be done, but I think that it would be much messier than for FDR to abrogate the gold clauses. The dollar was the unit of account in the US and there was no change in the currency in circulation, dollars before dollars after. There would also be much greater resistance by and potential retribution from other countries than was the case for countries leaving the gold standard. But you are right: it could be done. And probably the sooner the better.


  8. 8 Richard W December 14, 2011 at 7:12 pm

    @ David Pearson

    You are assuming that the debt contracts are governed by local law. A lot of bonds use UK law and New York law even if the issuer has nothing to do with those jurisdictions. Purchasers will often accept a lower interest rate if UK law is used, which offers the holder more protection. Of the existing Greek sovereign bond stock, 10% is issued using UK law.

    The EU under pressure from the banks insisted that Greek bonds exchanged for new ones at 50 percent of par value in the ‘ voluntary ‘ swap would be governed by UK law. The Greek government and the EFSF share the risk on the revamped bonds. From the EU perspective that raised the bar on the benefits of Greece leaving the EZ, and the attractiveness of the swap increased for investors with the change in governing law. Not sure what Greece got out of it.


  9. 9 David Pearson December 14, 2011 at 10:09 pm

    The reason I bring it up is MM’s seem to expend time and effort berating the ECB and Germany for their policies. To stay true to their preferred analogy of the gold standard abandonment, it seems MM’s should instead be forceful advocates for the dissolution of the Euro Zone. I still wonder whether ex ante the countries leaving gold thought that it would be quite messy and painful to do so. Now, as then, if the policy is successful, the “mess” will appear unimportant from the view of history.


  10. 10 Steve December 15, 2011 at 8:11 am

    I’ve been looking for papers on this topic. The issue in the gold standard is that the first exits are subject to a stigma and possible capital flight. So everyone wants out, but they wait for someone else to move first.

    Also, it’s worth anticipating the Austrian/RBC/gold bug/Conservative counterarguments. They look at the full set of gold standard exits. Almost the entire Southern hemisphere left gold in 1929-30, including Brazil, Argentina, Australia, and New Zealand. These countries didn’t escape the depression, they argue, therefore leaving gold wasn’t truly helpful.

    I don’t buy their argument; I suspect early exits couldn’t fully escape the downward pull of global AD shocks, even by leaving gold early. This was probably especially so due to their production of commodities and their trade relations with European colonizers.

    The early exit/credibility problem is common. It was also an issue in the GD and it was an issue for banks in 2007/2008, where none wanted to be first to cancel their dividends for fear of looking weak. And it’s true in the Eurozone today.


  11. 11 JP Koning December 15, 2011 at 3:37 pm

    Note that the time axis on Deutsche’s top chart is wrong. It has Britain leaving the gold standard in 1930, but it left in Sep 1931. They have the US revaluing the dollar in 1932, but that didn’t start happening till mid 1933. Italy left gold in October 1936, not 1935. The whole time axis needs to be shifted. Pretty dumb mistake, makes me doubt the veracity of their other charts.


  12. 12 JP Koning December 15, 2011 at 3:46 pm

    For me to really buy Deutsche’s argument, I’d also want to see Switzerland, Poland, and Holland on their charts, since they too held on till 1936.

    Note too that like Belguim (which Mitch points too), Italy didn’t leave gold till 1936 but was already well on the way to recovery.

    Just don’t like these charts. Not your fault, David.


  13. 13 David Glasner December 15, 2011 at 6:15 pm

    Richard, Thanks for explaining that.

    David, The gold standard could have been salvaged had there been a radical change in policy on the part of the leading countries, namely, the US and France. England could not unilaterally have reversed the gold policy. It is entirely within the capacity of the ECB to change its policy. All that is required is for Mrs. Merkel to give the ECB the green light to change policy.

    Steve, Do you have a reference for the argument about the countries in the Southern hemisphere leaving the gold standard?

    JP, Thanks for figuring out those charts. They were not very easy to understand, and I really didn’t look them over as carefully as I ought to have looked at them.


  14. 14 Steve December 15, 2011 at 9:55 pm


    I read on a blog somewhere that leaving the gold standard wasn’t sufficient for recovery from the depression, and they cited Latin America. It was more of a comment than a well developed argument.

    My comments about credibility, capital flight, commodities, etc., in the last 2 paragraphs are my own attempt to understand what happened.

    This paper gives a really interesting (to me, at least) overview of Argentina in the depression and they way they managed gold. It says exiting gold helped them weather the depression (but having significant gold going in helped too!).

    Click to access w6767.pdf

    I’ve been pondering whether there are any lessons or analogies to today to be drawn from these countries during the Depression. The common theme seems to be that the “peripheral” gold standard countries (LatAm, Australia, etc.) experienced huge capital inflows in the late 1920s, which came to a hard stop in 1929-30.


  15. 15 David Glasner December 16, 2011 at 9:03 am

    Steve, Thanks for the link, I will have a look at the paper and hope that it will trigger some sort of intelligent response on my part.


  16. 16 Benjamin Cole December 16, 2011 at 3:36 pm

    David–Lars Christensen has posted a guest blog by me. Read and critique away! This is your chance to get even. 🙂


  17. 17 David Glasner December 20, 2011 at 8:50 am

    Benjamin, So I did, thanks for giving me a target. It was an opportunity worth waiting for.


  18. 18 Peter Ramsey December 24, 2011 at 8:37 pm

    Are we focussing too much on the western economic and financial situation just a wee bit too narrowly?
    Monetary trend analysis and historical economic comparisons from policies emanating from the Great Depression are enticing……..but do not account for:

    1-The explosion in consumerism and service oriented (knowledge) societies in relation to industrialist (output) societies.
    2-The more complex monetary interactions and economic interdependencies of a globalized and interconnected world.
    3-Volatility and unpredictability of the stock markets due to trader manipulations and investor behaviors, due to the speed on information exchanges.
    4-The utter failure of political intervention and effective governance.
    5-The complete domination of the economy (industrialism) by the monetarists (capitalism).

    May I suggest to Mrs Merkel the unthinkable, and to pursue a policy to bring the Euro to parity with the US Dollar? Since the Germans are addicted to sustaining their competitive industrial base, and Mr Sarkoy is addicted to laissez faire while practicing jeu de la vie policies in France, would this not at least prolong the Euro? It may allow Eurozone nations to ease out of the Euro pact a bit more elegantly as well.


  19. 19 David Glasner December 27, 2011 at 9:19 am

    Peter, Are you suggesting that the euro fall in value relative to the dollar? The question is how that comes about. Both Europe and the US need rising prices. It would be a disaster for both the US and Europe if the euro fell in value relative to the dollar because of deflation in the US (at least under current conditions).


  20. 20 Anthony Migchels January 2, 2012 at 10:03 am

    How are prices to rise in the economy?

    If you have a Greenback, you can just print some more.

    If your money is debt, you can’t inflate your way out of it. Every new dollar is a new debt.

    Worse: every new debt brings new interest costs.

    No, this system is so sick: banks printing money and then raping the public with interest, it’s an incredible disgrace.

    All the perverse side effects of the system, like the one just mentioned.

    The only way forward is a complete overhaul.

    The Government must end the Monopoly of the Federal Reserve. And print some interest free credit or debt free money.

    Keep in mind: the problem is not debt. It’s interest.


  21. 21 David Glasner January 3, 2012 at 1:21 pm

    Anthony, Sorry, but I can’t follow a word of what you are saying.


  22. 22 Anthony Migchels January 4, 2012 at 2:14 am

    You want rising prices David.
    The normal method is to debase currency by printing more of it.

    But if your currency is based on debt, bearing interest, capital costs in the economy will rise with the money supply.

    This is a hidden dynamic that is insufficiently addressed by orthodox academics.

    Besides, of course, the horrible injustice of printing credit (money) from squat and then having the public paying interest over it.

    You do realize the banking system CREATES money, don’t you? And if it does, it simply is unconscienable to rape the people with interest.

    Just go figure: you pay 300k interest over a 200k mortgage over 30 years. Ending up paying a total of 500k for your 200k house.
    While the banking system just prints the money!

    That is what REAL monetary reform is all about.


  23. 23 David Glasner January 4, 2012 at 9:57 am

    Anthony, Interest existed before banks. Interest rates are now at the lowest levels in at least 60 years. In Japan, where debt levels are even higher as a percentage of GDP than in the US, long-term interest rates are less than 1%. So I am sorry, but I still have no idea what you are talking about.


  1. 1 Christina Romer Really Gets It « Uneasy Money Trackback on December 18, 2011 at 9:32 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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